What is the downside of investing in the utility sector?

There several disadvantages associated with investing in the utility sector. Utility stock prices are unlikely to fluctuate, reducing the potential for capital gain. There is also the risk that the stocks may decline to the point that the investor suffers losses. Another downside of utility stocks is that they are not insured by the Federal Deposit Insurance Corporation (FDIC) or protected by the government in any way. This adds a greater risk for investors, who will have no recourse if a utility company goes bankrupt.

Though utility companies tend to offer high-yield dividends, this does not mean that they will not be reduced or even eliminated entirely. Several utility companies have reduced their dividends over the past few years. Utilities have fairly high standard deviation rates, with their average rate from 1927-2011 being 22.2%. In contrast, treasury security standard deviation rates ranged from 3.1-9.8% within the same time period. The average deviation rate for the stock market in its entirety was only 20.5%. Although considered by most to be defensive stocks, utilities have a track record of poor performance in bear markets, such as in years 2002 and 2008, when utility companies lost 23% and 29%, respectively.

A foreseeable risk to investing in utilities is the rising market of renewable energy. The National Renewable Energy Lab estimates that by the year 2050, renewable energy could source approximately 80% of the world's energy. The downside of this rising energy market is that it may threaten the futures of traditional utility companies.

In spite of these disadvantages, the utility sector may be the right choice for an investor who can afford taking on the possible risk associated with these stocks. Those who seek a steady dividend income may want to consider investing in the utility sector as well. These stocks are also ideal for those who want to add defensive stocks to their portfolios.

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